Lending curbs make property bubble impossible – Honohan

Central Bank governor says we now have tools available to prevent repeat episode

Prof Honahan suggested that regrets over blocking Irish demands to impose a haircut on holders of senior debt in Anglo-Irish Bank may have persuaded European policymakers to approve 2013 deal on promissory note. Photograph: Alan Betson/The Irish Times

The restrictions on mortgage lending introduced by the Central Bank have made another Irish housing bubble impossible, the outgoing governor of the Central Bank, Patrick Honohan, said on Tuesday night.

Speaking at the London School of Economics , he said: “We decided to use up all our political capital on this. It sends a clear signal that tools are available to the financial authorities and will be used to prevent any recurrence of this bubble.

“I don’t know where Dublin house prices will be in five years but I know there won’t be another bubble because we have the tools to prevent it.”

Prof Honohan also said Ireland’s recovery could have been faster and austerity less harsh if European institutions had adopted a more flexible approach to bank recapitalisation.

He suggested regrets about blocking Irish demands to impose a haircut on holders of senior debt in Anglo-Irish Bank may have persuaded European policymakers to approve the 2013 deal on the Anglopromissory note.

Equity stake

“I think it’s fair to say that European decision makers subsequently had misgivings about having blocked this bail-in (not least when they eventually came around to the view, now embodied in the European bank resolution legislation, that Governments should be largely insulated from the costs of failing banks).

“This may well have influenced their willingness to acquiesce in the subsequent arrangements around the liquidation of the relevant institutions in early 2013, arrangements which had considerable financial advantages to Ireland,” he said.

Prof Honohan said a decision by the European Stability Mechanism (ESM) to shoulder the burden of recapitalising the banks would have helped Ireland’s recovery and been more profitable for the ESM.

The ESM could, he said, have taken an equity stake in the relevant banks, or offered a tail-risk insurance on the banks’ assets, rather than adding to the debt overhanging the Government.

“A smaller debt overhang for the Irish Government in 2011 would surely have hastened the restoration of market confidence, the recovery of productive investment and consumption spending (sustaining domestic economic activity) and the recovery of the public finances,” he said.

The governor said the Government had argued in favour of such an approach but it was rejected, as were calls for Ireland’s bailout loan to be structured in such a way that reduced the fear the country’s debt burden was unsustainable.

He said part of the debt could have been substituted with a loan whose repayments were linked to GDP growth.

“Such a contract would have transformed the consequences of a slower-than-hoped recovery by limiting or eliminating debt-servicing payments in an orderly and pre-agreed way until GDP recovered sufficiently. This, too, would have accelerated the return of private sector confidence and boosted economic activity,” he said.

Despite his misgivings about some of the actions of European policymakers, he said the international bailout was necessary and it was unlikely a more gradual fiscal adjustment would have had a significant impact on unemployment or recovery.

“Indeed, the recovery might have consolidated somewhat faster if the Government had moved a little more ahead of the curve, as in my expressed opinion at the time, though there was probably not much in it,” he said.